*EDIT* Rico is of course correct. Beta2 installs onto the internal memmory. There are SD card roms for Froyo, but Beta2 is not one of them.
I'm not an expert, but I did give Phiremod Beta2 a try last week. That said:
1) Yes, I'm pretty sure you will need to do this. I also think you should do this to take advantage of the extra speed. I think that Kernel is also set up to run at 75% voltage compared to stock, so if you pair it with SetCPU (which is a must buy if you have not already bought it) you can extend your battery life.
2) Yes. Read up on Ti Backup (this is also a must have for various reasons). You can use this to back up your apps and then reinstall them after you switch roms. I have not figured out how to do this yet, but I don't have that many apps. I just redownload and install them. Don't worry if you've purchased apps. They will show up in the Market as purchased and availble for download at no additional cost if you sign in with the same gmail ID.
3) See Rico's post above. To clarify, you use the SD card to load the rom into the internal memmory. It does not run from the SD card after install. There are Froyo roms that run off the SD, but I'd recommend using the internal memmory instead as it should run faster. As everyone always says, make a backup of your current setup before you start messing around and you should be good to go. If you don't know how to make a backup, go into Rom Manager and select "boot to recovery." When recovery loads up, select backup and restore and then backup. It will take 10 minutes or so to complete. When it's done, mount the SD card in Windows (or whatever you use) and copy the backup onto your desktop for safe keeping.
I think the above is all correct.
That said, I decided to give Nookie Froyo 0.6.8 a try and I like it more than Beta2. Just seems to run a little faster and my WiFi works better. YMMV. The same rules apply for going to Nookie Froyo if you decided to go that route instead.
Cool thanks! Btw, what video player do you use Mooniegt? Also for titanium back up, I noticed you have to restore the apps one at a time unless you get the pro version (which is like $6 too much imo); does Astro allow you to restore all your apps in one go? Or would you need the pro version for that as well?